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Item 2. Management’s Discussion and Analysis

2025-05-02 compared with 2024-11-08 · 50 added, 79 removed, 82 unchanged (61% of the section changed)

8 unchanged sentences

(i) our belief regarding the exposure of our cash and accounts receivable to credit risk;

(ii) our beliefs regarding the quality of our work product and guest service and our ability to capture additional market share in the high-end segment of the market;

(iii) our beliefs regarding the quality of our properties as key factors in each of their long-term success;

(iv) our expectations regarding the employment growth in the Reno market, the tight labor market (including wage inflation) and its effect on our business at Atlantis;

(v) our expectations and intentions regarding the expenses, defenses and outcomes of the lawsuits filed by the construction project general contractor against us and our counterclaims and separate lawsuit against the contractor;

(vi) our expectations regarding our business prospects, strategies, estimates and outlook;

(vii) our expectations regarding the positioning of our properties to benefit from future macro and local economic growth;

(viii) our expectations regarding future capital requirements;

(ix) our anticipated sources of funds and adequacy of such funds to meet our debt obligations and capital requirements;

and (x) our expectations regarding legal and other matters.

(ii) our expectations regarding the litigation and any appeal relating to the construction of the Monarch Black Hawk expansion and related liens recorded by the general contractor and certain subcontractors against the Monarch Black Hawk;

(iii) our expectations regarding our business prospects, strategies, estimates and outlook;

(iv) our expectations regarding the positioning of our properties to benefit from future macro and local economic growth;

(v) our expectations regarding future capital requirements;

(vi) our anticipated sources of funds and adequacy of such funds to meet our debt obligations and capital requirements;

and (vii) our expectations regarding legal and other matters.

Forward-looking statements are neither historical facts nor assurances of future performance.

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Monarch Black Hawk also is experiencing labor challenges, resulting from the distance to the staffing filter markets of Golden, Colorado and the Denver Metro area.

We continue to attract high-value players from across Colorado’s Front Range, who had previously traveled to other markets, such as Las Vegas, for a high-end casino entertainment experience.

We continue to attract high-value players from Denver and Boulder metro areas, who had previously traveled to other markets, such as Las Vegas, for a high-end casino entertainment experience.

We believe that the quality of our expanded product and exceptional guest service will meet the demand of the high-end segment of the market and will grow revenue and accelerate market share.

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RESULTS OF OPERATIONS

Comparison of Operating Results for the Three-Month Periods Ended September 30, 2024 and 2023

For the three months ended September 30, 2024, our net income totaled $27.6 million, or $1.47 per diluted share, compared to net income of $24.2 million, or $1.23 per diluted share for the same period in 2023, reflecting a 14.2% and 19.5% increase in net income and diluted earnings per share, respectively.

Net revenues in the three months ended September 30, 2024, totaled $137.9 million, an increase of $4.9 million, or 3.7%, compared to the three months ended September 30, 2023.

Income from operations for the three months ended September 30, 2024, totaled $35.3 million compared to income from operations of $31.9 million for the same period in 2023.

Casino revenue increased 3.4% in the third quarter of 2024 compared to the third quarter of 2023.

The increase in casino revenue was driven primarily by the continued increase in market share at our property in Black Hawk.

This was partially offset by an increase in promotional allowances at both properties.

Casino operating expense as a percentage of casino revenue increased to 36.3% for the three months ended September 30, 2024, compared to 34.5% for the three months ended September 30, 2023, primarily due to an increase in labor expense and slots participation expense.

Food and beverage revenue for the third quarter of 2024 decreased 0.2% compared to the third quarter of 2023 due to 2.4% decrease in covers.

Comparison of Operating Results for the Three-Month Periods Ended March 31, 2025 and 2024

For the three months ended March 31, 2025, our net income totaled $19.9 million, or $1.05 per diluted share, compared to net income of $18.3 million, or $0.93 per diluted share, for the same period in 2024, reflecting a 8.7% and 12.9% increase in net income and diluted earnings per share, respectively.

Net revenues in the three months ended March 31, 2025, totaled $125.4 million, an increase of $3.7 million, or 3.1%, compared to the three months ended March 31, 2024.

Income from operations for the three months ended March 31, 2025, totaled $25.3 million compared to income from operations of $23.8 million for the same period in 2024.

Casino revenue increased 5.0% in the first quarter of 2025 compared to the first quarter of 2024.

The increase in casino revenue was driven primarily by the continued increase in market share at our properties.

Casino operating expense as a percentage of casino revenue decreased to 37.7% for the three months ended March 31, 2025, compared to 38.0% for the three months ended March 31, 2024, primarily due to better labor management and operational efficiency.

Food and beverage revenue for the first quarter of 2025 decreased 0.5% compared to the first quarter of 2024 due to 0.7% decrease in covers, resulting from the calendar (one less day in first quarter of 2025 than the first quarter of 2024).

Food and beverage revenue per cover increased 0.2%.

Food and beverage operating expense as a percentage of food and beverage revenue in the third quarter of 2024 increased to 72.8% compared to 70.8% in the third quarter of 2023 as a result of an increase in COGS and an increase in operating supplies expense.

Hotel revenue increased 5.0% in the third quarter of 2024 compared to the same quarter of 2023 primarily as a result of ADR increased by $1.92 ($180.70 in the third quarter of 2024 and $178.78 in the third quarter of 2023).

Hotel occupancy increased to 89.7% during the third quarter of 2024 compared to 88.1% during the third quarter of 2023.

RevPAR was $176.47 and $169.63 for the three months ended September 30, 2024 and 2023, respectively.

Hotel operating expense as a percentage of hotel revenue decreased to 33.8% in the third quarter of 2024 compared to 34.8% for the comparable prior year period primarily as a result of increase in ADR and improved cost management.

Other revenue increased 26.3% in the third quarter of 2024 compared to the same prior year period primarily due to an increase in spa and commission revenues at both properties, as well as proceeds from finalization of Employee Retention Credit review by IRS.

SG&A expense increased to $27.2 million in the third quarter of 2024 from $27.1 million in the third quarter of 2023 driven primarily by increase in labor expense.

As a percentage of net revenue, SG&A expense decreased to 19.7% in the third quarter of 2024 compared to 20.4% in the same period in 2023.

Depreciation and amortization expense increased to $13.1 million for the three months ended September 30, 2024, compared to $12.2 million for the same prior year period, due to new assets placed into service with the ongoing renovation at Atlantis.

During the third quarter of 2024 we recognized $0.2 million in loss on disposal of assets.

During the third quarter of 2023, we recognized $3.0 million in professional service fees relating to our construction litigation.

In the third quarter of 2024 and 2023, we recognized $0.1 and $0.4 million of interest expense, net of interest income, respectively.

See further discussion of our Amended Credit Facility in the LIQUIDITY AND CAPITAL RESOURCES section below.

Comparison of Operating Results for the Nine-Month Periods Ended September 30, 2024 and 2023

For the nine months ended September 30, 2024, we had a net income of $68.6 million, or $3.60 per diluted share, compared to net income of $64.2 million, or $3.27 per diluted share for the same period in 2023, reflecting a 6.7% and 10.1% increase in net income and diluted earnings per share, respectively.

Net revenues in the nine months ended September 30, 2024, totaled $387.7 million, an increase of 3.9%, compared to the nine months ended September 30, 2023.

Income from operations for the nine months ended September 30, 2024 totaled $88.6 million compared to $84.8 million income from operations for the same period in 2023.

Casino revenue increased 3.4% in the first nine months of 2024 compared to the first nine months of 2023 and was driven by an increase in market share at Monarch Black Hawk.

Casino operating expense as a percentage of casino revenue increased to 37.3% for the nine months ended September 30, 2024 compared to 36.5% for the nine months ended September 30, 2023 primarily as a result of increase in labor expense and increase in promotional allowances.

Food and beverage revenue for the first nine months of 2024 increased 1.2% compared to same period in 2023 due to a 2.0% increase in food and beverage revenue per cover.

Food and beverage covers decreased year-over-year by 0.9%.

Food and beverage operating expense as a percentage of food and beverage revenue increased in the first nine months of 2024 to 73.8% from 72.6% for the same period in 2023 primarily as a result of an increase in COGS.

Hotel revenue increased 7.3% in the first nine months of 2024 compared to the first nine months of 2023 primarily due to an increase in ADR by $9.86, from $172.62 in the first nine months of 2023 to $182.48 in the first nine months of 2024, combined with a slight increase in occupancy from 84.7% during the first nine months of 2023 to 84.8% during the same period of 2024.

RevPAR was $167.74 for the first nine months of 2024 and $160.04 for the first nine months of 2023.

Hotel operating expense as a percentage of hotel revenue decreased to 34.2% in the first nine months of 2024 compared to 37.1% for the comparable prior year period primarily as a result of increase in ADR and improved cost management.

Other revenue increased 13.9% in the first nine months of 2024 compared to the same prior year period.

SG&A expense increased to $80.4 million in the first nine months of 2024 from $77.2 million in the first nine months of 2023 primarily due to:

$2.6 million increase in labor expense;

$0.7 million increase in repair and maintenance expense;

and $0.4 million increase in advertising and marketing expenses, partially offset by $0.5 million decrease in utility expense.

As a percentage of net revenue, SG&A expense increased to 20.8% in the first nine months of 2024 compared to 20.7% in the same period in 2023.

Depreciation and amortization expense increased to $38.0 million for the nine months ended September 30, 2024 compared to $35.2 million for the same prior year period, due to new assets placed into service with the ongoing renovation at Atlantis.

During the first nine months of 2024 we recognized $0.6 million in professional services fees relating to our construction litigation and $0.1 million in loss on disposal of assets.

During the first nine months of 2023, we recognized $4.1 million in professional service fees relating to our construction litigation, $0.1 million in loss on disposal of assets and $1.2 million in proceeds from a sale of a COVID closure related insurance claim.

During the first nine months of 2024, we expensed $0.3 million of interest, net of interest income.

During the first nine months of 2023, we expensed $1.7 million of interest, net of interest income.

Food and beverage operating expense as a percentage of food and beverage revenue in the first quarter of 2025 decreased to 74.3% compared to 74.8% in the first quarter of 2024 due primarily to the increase in revenue per cover.

Hotel revenue decreased 0.4% in the first quarter of 2025 compared to the same quarter of 2024 primarily as a result of lower number of available rooms as a result of the calendar (one less day in first quarter of 2025 than the first quarter of 2024) and more rooms in the current year out of availability due to the ongoing renovation.

ADR increased by $10.83 ($192.32 in the first quarter of 2025 and $181.49 in the first quarter of 2024).

Hotel occupancy increased to 80.9% during the first quarter of 2025 compared to 78.7% during the first quarter of 2024.

RevPAR was $167.67 and $153.42 for the three months ended March 31, 2025 and 2024, respectively.

Hotel operating expense as a percentage of hotel revenue decreased to 37.7% in the first quarter of 2025 compared to 35.6% for the comparable prior year period primarily due to lower available rooms.

Other revenue increased 9.2% in the first quarter of 2025 compared to the same prior year period primarily due to an increase in spa and commission revenues at both properties.

SG&A expense increased to $27.2 million in the first quarter of 2025 from $27.1 million in the first quarter of 2024.

As a percentage of net revenue, SG&A expense decreased to 21.7% in the first quarter of 2025 compared to 22.3% in the same period in 2024.

Depreciation and amortization expense increased to $13.2 million for the three months ended March 31, 2025, compared to $12.5 million for the same prior year period, due to new assets placed into service with the ongoing renovation at Atlantis.

We recognized $0.4 million and $0.5 million for the three months ended March 31, 2025 and 2024, respectively in professional service fees relating to our construction litigation.

In the first quarter of 2025, we recognized $0.3 million of interest expense, net of interest income, related to the amortization of debt issuance costs.

See further discussion of our Amended Credit Facility in the LIQUIDITY AND CAPITAL RESOURCES section below.

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We seek to continually upgrade and maintain our facilities in order to present a fresh, high quality product to our guests.

Cash paid for capital expenditures for the nine-month periods ended September 30, 2024 and 2023 totaled $34.4 million and $34.6 million, respectively.

During the nine-month period ended September 30, 2024, our capital expenditures related primarily to the redesign and upgrade of hotel rooms in the third tower at Atlantis, and the acquisition of gaming, and other equipment to upgrade and replace existing equipment at Atlantis and Monarch Black Hawk.

During the nine-month period ended September 30, 2023 our capital expenditures related primarily to the redesign and upgrade of hotel rooms in the second tower at Atlantis, re-carpeting the casino floor at Atlantis and the acquisition of gaming, and other equipment to upgrade and replace existing equipment at Atlantis and Monarch Black Hawk.

Capital expenditures during each of the first nine months of 2024 and 2023 were funded from operating cash flows and borrowings against the Company’s credit facility.

Cash paid for capital expenditures for the three-month periods ended March 31, 2025 and 2024 totaled $16.0 million and $17.9 million, respectively.

During the three-month period ended March 31, 2025, our capital expenditures related primarily to the redesign and upgrade of hotel rooms in the third tower at Atlantis, and the acquisition of gaming, and other equipment to upgrade and replace existing equipment at Atlantis and Monarch Black Hawk.

During the three-month period ended March 31, 2024, our capital expenditures related primarily to the redesign and upgrade of hotel rooms in the third tower at Atlantis, and the acquisition of gaming, and other equipment to upgrade and replace existing equipment at Atlantis and Monarch Black Hawk.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity have been cash provided by operations and, for capital expansion projects, borrowings available under our Amended Credit Facility.

For the nine months ended September 30, 2024, net cash provided by operating activities totaled $102.9 million, compared to net cash provided by operating activities of $134.4 million in the same prior year period.

This decrease was primarily a result of the decrease in income tax receivable as a result of receipt of an income tax refund in the third quarter of 2023 and change in working capital, offset by an increase in depreciation expense, net income, and stock options expense.

Net cash used in investing activities totaled $34.4 million and $34.6 million during the nine months ended September 30, 2024 and 2023, respectively.

Net cash used in investing activities during the first nine months of 2024 consisted primarily of cash used for the redesign and upgrade of hotel rooms in the third tower at Atlantis and the acquisition of gaming and other equipment at both properties.

Net cash used in investing activities during the first nine months of 2023 consisted primarily of cash used for the redesign and upgrade of hotel rooms in the second tower at Atlantis, re-carpeting the casino floor at Atlantis, and the acquisition of gaming and other equipment at both properties.

Net cash used in financing activities in the first nine months of 2024 totaled $72.5 million and consisted of $60.0 million cash used for purchase of Company stock under the Repurchase Plan and $16.7 million used for payment of dividends, partially offset by $2.7 million of net proceeds from stock options exercise and $1.5 million of borrowings under the Amended Credit Facility, net of the payments to the lender under the Amended Credit Facility.

Net cash used in financing activities in the first nine months of 2023 totaled $104.6 million and consisted of $107.0 million used for payment of dividends, offset by $1.3 million of net proceeds from stock options exercise and $1.0 million of borrowings under the Amended Credit Facility, net of the payments to the lender under the Amended Credit Facility.

Amended Credit Facility

On February 1, 2023, the Company entered into the Fifth Amended and Restated Credit Agreement (the “Amended Credit Facility”) with Wells Fargo Bank, N.A., as administrative agent.

The Amended Credit Facility provides for a $100 million line of credit which matures on January 1, 2025.

As of September 30, 2024, we had an outstanding principal balance of $7.0 million under the Amended Credit Facility.

In addition to other customary covenants for a facility of this nature, as of September 30, 2024, we were required to maintain a Total Leverage Ratio (as defined in the Amended Credit Facility) of no more than 2.5:1 and Fixed Charge Coverage Ratio (as defined in the Amended Credit Facility) of at least 1.1:1.

As of September 30, 2024, our Total Leverage Ratio and Fixed Charge Coverage Ratio were 0.04:1 and 109.52:1, respectively.

The interest rate under the Amended Credit Facility is SOFR (the Secured Overnight Financing Rate) plus a margin ranging from 1.00% to 1.50%, or a base rate (as defined in the Amended Credit Facility) plus a margin ranging from 0.00% to 0.50%.

The applicable margins will vary depending on the Company’s leverage ratio.

In addition, SOFR-based loans will incur a 0.10% credit adjustment spread due to the conversion from LIBOR to SOFR as the new benchmark rate.

As of September 30, 2024, the interest rate was 6.2%, or SOFR plus a 1.00% margin.

The Company’s obligations under the Amended Credit Facility are secured by substantially all of the Company’s assets.

We believe that our anticipated operating cash flows will be sufficient to sustain operations for the twelve months from the filing of this Form 10-Q for the quarter ended September 30, 2024 and fulfill our capital expenditure plans and authorized dividend distributions.

For the three months ended March 31, 2025, net cash provided by operating activities totaled $36.5 million, compared to net cash provided by operating activities of $38.3 million in the same prior year period.

This decrease was primarily a result of the change in working capital, offset by an increase in depreciation expense, net income, and stock options expense.

Net cash used in investing activities totaled $16.0 million and $17.9 million during the three months ended March 31, 2025 and 2024, respectively.

Net cash used in investing activities during the first three months of 2025 consisted primarily of cash used for the redesign and upgrade of hotel rooms in the third tower at Atlantis and the acquisition of gaming and other equipment at both properties.

Net cash used in investing activities during the first three months of 2024 consisted primarily of cash used for the redesign and upgrade of hotel rooms in the third tower at Atlantis and the acquisition of gaming and other equipment at both properties.

Net cash used in financing activities in the first three months of 2025 totaled $4.1 million and consisted of $5.5 million used for payment of dividends, partially offset by $1.4 million of net proceeds from stock options exercise.

Net cash used in financing activities in the first three months of 2024 totaled $24.3 million and consisted of $19.6 million in cash used for payment of dividends, partially offset by $1.0 million of net proceeds from stock options exercise.

Sixth Amended Credit Facility

On December 31, 2024, the Company entered into the Amended and Restated Credit Agreement (the “Amended Credit Facility”) with Wells Fargo Bank, N.A., as administrative agent.

The Amended Credit Facility amends and restates the Company’s $100.0 million credit facility, dated as of February 1, 2023 (the “Prior Facility”).

The Amended Credit Facility extends the maturity date to January 1, 2028 and removes the lien on real property under the Prior Facility.

As of March 31, 2025, the Company had no outstanding principal balance under the Amended Credit Facility, a $0.6 million standby letter of credit and $99.4 million remained available for borrowing.

In addition to other customary covenants for a facility of this nature, as of March 31, 2025, we were required to maintain a Total Leverage Ratio (as defined in the Amended Credit Facility) of no more than 1.5:1 and Fixed Charge Coverage Ratio (as defined in the Amended Credit Facility) of at least 1.1:1.0.

As of March 31, 2025, our Total Leverage Ratio and Fixed Charge Coverage Ratio were 0.0:1.0 and 49.2:1.0, respectively.

On February 24, 2025, Wells Fargo Bank agreed to waive its right to declaring an event of default under the Amended Credit Facility arising out of the February 14, 2025 judgment on the litigation between Monarch and PCL, so long as we strictly comply with each and every other provision of the Amended Credit Facility.

We believe that we are in full compliance.

The interest rate under the Amended Credit Facility is either SOFR (the Secured Overnight Financing Rate) plus a margin of 1.25%, or a base rate (as defined in the Amended Credit Facility) plus a margin ranging of 0.25% per annum.

The Commitment Fee Percentage (as defined in the Amended Credit Facility) was revised to be 0.25% per annum.

We believe that our anticipated operating cash flows will be sufficient to sustain operations for the twelve months from the filing of this Form 10-Q for the quarter ended March 31, 2025 and fulfill our capital expenditure plans and authorized dividend distributions.

However financial, economic, competitive, regulatory, and other factors, many of which are beyond our control, could negatively impact our operations.

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For a more extensive discussion of our accounting policies, see Note 1.

“Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements in our 2023 Form 10-K filed with the SEC on February 28, 2024.

“Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements in our 2024 Form 10-K filed with the SEC on March 3, 2025.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis